A matter of human rights
The recent High Court decision in Leeds v Lemos (2017) EWHC 1825 has provided unwelcome news to the insolvency industry; the court holding that it was not open to a trustee in bankruptcy to waive the legal professional privilege attaching to the bankrupt's (Mr Lemos) correspondence with his solicitor, without the express consent of the bankrupt.
The documents in question related to the transfer of Mr and Mrs Lemos' London home in 1994 to an offshore trust, the sole beneficiary of which was Mrs Lemos. Following litigation commenced by Mr Lemos' sister against him, Mr Lemos petitioned for his own bankruptcy. A trustee in bankruptcy was appointed in April 2015 and on reviewing the files of Mr Lemos' former solicitor found correspondence which was highly suggestive that the 1994 transfer was one which could be seen to constitute a transfer defrauding creditors (section 423 IA 1986). The case concerned the trustee's application for permission to rely on and use the correspondence in the face of Mr Lemos' objections.
The legal issues
His Honour Judge Hodge was required to assess the continuing application of the Crescent Farm Principle (namely that legal professional privilege passes to a successor in title of the property to which the privileged information relates; deriving from the case of Crescent Farm (Sidcup) Sports Limited vs Sterling Office Limited  CH 553), in light of the Court of Appeal decision in Avonswick Holdings Limited vs Shlosberg  EWHC 1001(CH).
The Avonswick case had determined that where legally privileged documentation related to the bankrupt's liabilities, although the trustee was entitled to see that documentation, the trustee could not waive privilege such that the documentation could be used by a third party in litigation that they were pursuing against fellow stakeholders of Avonswick. It was held that the right to waive privilege remained solely with the bankrupt, not the trustee.
The question before Mr Justice Hodge was whether the Crescent Farm Principle (which was applied in the case of re Konigsberg  1WLR 1257) allowed the trustee to rely on and use the legally privileged documents, due to the fact that the correspondence related to an asset of the bankrupt as opposed to a liability. Even if the privilege remained with the bankrupt, the Court was also asked to determine whether the bankrupt could be ordered to waive privilege (applying section 333 and 363 IA 1986).
Mr Justice Hodge determined that the Crescent Farm Principle simply determines that the right to assert privilege passes to a successor in title; it did not determine that a successor in title could waive that privilege. Furthermore no distinction should be drawn between legal privilege attaching to a bankrupt's liabilities, as opposed to a bankrupt's assets.
In his Judgment Mr Justice Hodge stressed that the right to take legal advice was a fundamental human right, that privilege that arose from that advice should only be overridden by legislation, and this was not provided for in the Insolvency Act. Furthermore in regards to making an order that the bankrupt be compelled to waive privilege, this it was felt that this would only be ordered in exceptional circumstances, which were not made out here.
As a result of Leeds v Lemos case, whether the legally privileged correspondence relates to an asset or liability, while the trustee has a continuing right to see the privileged documentation to enable him to carry out his duties, that documentation cannot be relied on or used in evidence, unless the bankrupt waives privilege.
While the rationale for this decision has been criticised by some commentators the case is not subject to any appeal. It is therefore a significant blow to those who are pursuing bankrupts and who find evidence in the bankrupt's former solicitors' file of any wrongdoing.
For the time being, unless or until a case proceeds to the Court of Appeal or legislative reform intervenes, the human right of the individual to obtain privileged legal advice will trump the right of the trustee in bankruptcy to realise property for the benefit of bankrupt's creditors.
We would be very interested to hear of any of your experiences. Please do get in touch with our Business Recovery & Reconstruction team if there is anything that you would like to discuss.